Checkpoints for Reviewing Consulting Agreements: Practical Issues for the Client and the Consultant

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

In corporate legal practice, we review consulting agreements for a variety of purposes, such as management support, sales support and fundraising. While they are easy to start, for example by receiving advice on a monthly basis or commissioning strategy materials, they are also a type of contract that tends to proceed with vague terms and run into trouble.

Behind disputes over consulting agreements lies a gap between the results each side expects. The client expects that "since we are paying a fee, there should be visible results such as increased sales or operational improvements," while the consultant tends to see it as "a contract to provide specialist knowledge and advice, where the final outcome depends on the client's decisions and ability to execute." If the contract is signed with this gap in understanding left unresolved, it later leads to a conflict between "there are no results" and "we provided sufficient support."

The Legal Nature of the Work and Where to Draw the Line on Guaranteeing Results

A consulting agreement is a contract to provide specialist knowledge, research and analysis, recommendations and the like. Legally, some are close to a contract for work, which promises the completion of certain work, while others are close to a quasi-mandate, under which advice and support are provided with the care of a prudent manager. If the contract merely states, in abstract terms, "management consulting services," it is impossible to tell whether the work is limited to attending meetings, whether there is an obligation to submit research reports, or whether it includes hands-on execution support.

Distinguishing whether results are guaranteed or support is provided with the care of a prudent manager is the central point of the contract. Under a quasi-mandate contract, it is not enough simply to make an effort, but in practice it is difficult for the consultant to guarantee results that depend on market trends beyond its control or on the client's execution capabilities. So that goal-oriented wording such as "increase sales year on year" is not interpreted as an obligation, clearly separate in the clauses the obligation to provide advice and support from the non-guarantee of results. However, even where results are not guaranteed, the consultant is not exempt from liability for breach of the duty of care of a prudent manager, provision of seriously erroneous information or breach of confidentiality obligations.

Clarifying the Scope of Work, Working Conditions and Additional Fees

In monthly retainer-type contracts, working hours, meeting frequency and the scope of chat support in emergencies tend to be vague. Unless the contract specifies whether the service is limited to advice or includes execution support such as attending business meetings or preparing materials on the client's behalf, dissatisfaction over the scope of work will arise. Rather than making the contract "unlimited consultations," setting the number of meetings per month, a guideline for response time and priorities helps maintain a good relationship.

Where there are deliverables such as reports or proposals, set the format of the deliverables, the submission deadline and the number of revision rounds. If the contract does not involve creating deliverables, agree on procedures for monthly reports and sharing activity records. It is also important, in preparation for sudden requests or substantial revisions to materials, to set the boundary between work covered by the base fee and work that incurs additional fees, and the procedure for advance estimates.

Defining Success Fees and Intellectual Property Rights

When introducing success fees, setting a success fee does not necessarily create an obligation to complete a result (a contract for work), but if the definition of what counts as a success is vague, disputes will arise when the fee is paid. Agree clearly on how much the consultant's involvement can be said to have contributed when sales occur, and whether deals closed after the contract term ends and sales arising from continuing transactions with introduced parties are included in the fee.

In handling intellectual property rights, set separately the ownership of the research reports and proposal materials created and the rights in the consultant's own pre-existing analytical frameworks and templates. The client will want to secure the right to use the delivered materials not only internally but also in explanations to investors and in sales activities. The consultant, on the other hand, needs to prevent a situation in which even the rights in its general know-how and frameworks vest exclusively in the client and can no longer be used in other engagements.

Information Management, Conflicts of Interest and Limitation of Liability

In the course of consulting, a great deal of the company's confidential information, such as business plans, customer information and financial figures, is shared. The confidentiality clause should cover information shared not only in writing but also orally and through chat tools, and set restrictions on disclosure to third parties and the return or disposal of information when the contract ends. Where the consultant provides support as a team, it is useful to impose the same confidentiality obligations on assistants and to set measures to restrict access to information and separate the personnel in charge when the consultant supports competitors. The scope of conflicts of interest and non-competition, that is, whether the consultant can provide support to other companies in the same industry, should also be drawn by balancing the consultant's freedom of business against the protection of the client's confidential information.

For the contract term and termination, set whether there is a minimum contract term, the notice period for early termination and the conditions under which success fees arise after termination. In the limitation of liability clause, agree on where responsibility for the accuracy of the advice lies and the cap on damages. While the consultant will seek a clause avoiding unlimited liability, the client also needs to check the exceptions so that damages caused by willful misconduct or gross negligence or by serious breaches of confidentiality are not handled under a uniform low cap.

Generative AI is useful for identifying typical issues and omissions in consulting agreements. However, even under the same label of "sales support," background such as whether the client wants only advice on strategy or also wants the consultant to attend actual business meetings is not known to AI unless it is written in the contract. Convey the purpose of the request, the information to be shared and the results sought as the premises for the review. It is important that the results the client expects and the scope of obligations the consultant undertakes are judged by both sides in light of the business background.

Frequently asked questions

What type of contract is a consulting agreement under the law?

Some are close to a contract for work and others are close to a quasi-mandate. This is because these are contracts for providing specialized knowledge, research and analysis, recommendations and the like, and they may have the nature of a contract for work, which promises the completion of certain work, or the nature of a quasi-mandate, under which advice and support are provided with the duty of care of a prudent manager. It is understood to be important to specify the scope of services in the contract and to distinguish in writing between the obligation to provide advice and the absence of any guarantee of results.

Does setting a success fee in a consulting agreement create an obligation to deliver results?

It does not necessarily create an obligation to deliver results immediately. This is because it is considered that setting a success fee does not in itself immediately give rise to an obligation to deliver results. However, if the definition of what counts as a result is vague, disputes arise when the fee is paid, so it is necessary to agree clearly on matters such as the degree of contribution to sales and whether deals closed after the contract ends are included in the fee.

Do all intellectual property rights in materials created in a consulting engagement belong to the client?

Not all of them automatically belong to the client. This is because the ownership of rights in the research reports and proposal materials created needs to be provided for separately from the rights in the proprietary analytical frameworks and templates that the consultant already held. The consultant needs to separate the provisions to prevent a situation in which even its general know-how and frameworks belong exclusively to the client and can no longer be used on other engagements.